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LEGAL UPDATES

Short Sale Deficiencies

On January 1, 2011, the California Civil Code Section 580e was enacted. This statute prohibited a First Trust Deed lender from receiving a deficiency judgment against a short sale seller of 1 to 4 residential unit properties.

Through the efforts of C.A.R. on July 15th of the same year, the statute was broadened to include all deeds of trust secured against the subject property. In addition, the statute now prohibits the short sale lender from: (1) collecting a deficiency; (2) requiring the seller to sign a promissory note for the deficiency; (3) paying money for short sale approval; (4) having the seller waive his or her rights under the statute.

Although the statute covers many types of mortgages loans—such as purchase money, rate-and-term refinance, cash-out refinance, owner occupied, rental, second home, or vacation home—there are exclusions, as detailed below.

When the borrower/seller is:

1. A Corporation, LLC, or Limited Partnership

2. A Judgment Lien

3. Has a tax lien

4. Has a Homeowners Association Lien

Special rules apply if a promissory note is cross-collateralized by more than one property.

As a listing agent, you should verify the amount of the deficiency involved in the anticipated short sale transaction. There is no requirement that a lender consider a short sale transaction. If the subject property is seriously underwater, the lender may not wish to take that big of a loss. Although the lender is prohibited from requiring the seller to pay money for short sale approval, the seller can voluntarily offer to pay an amount to get the escrow to close. Unfortunately, in such a transaction, the seller usually does not have sufficient funds to make such an offer. In this scenario, the listing agent should be cautious of taking the listing and consider the chances of this transaction actually closing.

To aid both listing and selling agents, C.A. R. has created two forms that provide protection to the licensee. One is the brief “Short Sale Deficiencies Fact Sheet”. The other is a 12-page legal article on “Short Sale Deficiencies”. It is good Risk Management to provide both of these documents to a buyer or seller.

As a final note, if you wonder whether your C.A.R. membership dues actually help to protect your liability in a real estate transaction, the answer is a resounding “YES!”

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